Prime Minister Kevin Rudd sparked a political battle over Australia’s north by proposing a 10 percentage point ­company tax cut for businesses that relocate to the Northern Territory and lower foreign investment hurdles.

The policy, which means both major parties are committed to harnessing the economic potential of northern Australia, angered southern Liberal states. They believe such a large tax concession would distort the economy by sucking businesses towards Darwin while creating no extra jobs.

West Australian Premier Colin ­Barnett warned of damaging investment implications for offshore oil and gas reserves in the Kimberley region.

Mr Rudd will try to placate the WA government on Friday with a policy designed to maximise the domestic job and innovation benefits of the state’s oil and gas industries.

In Darwin on Thursday, Mr Rudd gazumped a promise made by Opposition Leader Tony Abbott in June – which Labor ridiculed – to commission a white paper to look at tax incentives and to lure people and business north, as well as other measures to boost tourism, food and energy production.

In a play for at least five critical seats in the Northern Territory and northern Queensland, Mr Rudd said that if elected, the territory would be declared a Northern Special Economic Zone with tax incentives and relaxed foreign investment rules.

He promised to expand the Ord Irrigation Scheme by 14,000 hectares with a $10 million grant to the NT government to boost agricultural output by $150 million.

The third so-called pillar of the strategy would be to develop 20-year growth plans for Darwin, Cairns, Townsville and Mackay, targeting infrastructure population and growth. Mr Abbott ­proposed in his plan to do the same with Darwin, Cairns, Townsville and Karratha.

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Independent MP Bob Katter suspected both announcements were, in part, designed to help convince him to do preference deals in key regional seats. Thursday’s announcement provoked angst inside Labor after it emerged Mr Rudd was not supposed to nominate a figure when spruiking the corporate tax cut. The policy document speaks only of reducing corporate taxes for companies based in the NT, using either an offset or a company tax cut.

Tax cut to take effect from 2018

Strategists said Mr Rudd had opened up Labor to pointed attacks.

“It’s causing problems," the source said, adding there was a growing worry in Labor that Mr Rudd was starting to freelance more in a bid to reverse Labor’s fortunes.

The Constitution prohibits preferential tax treatment for states but Mr Rudd noted the NT was not a state “and that’s why we intend to begin here".

The tax cut would take effect from 2018, putting it outside the four-year budget forecasts, meaning Mr Rudd didn’t have to provide a cost estimate. He nominated cutting company tax from 30 per cent to 20 per cent.

“My personal objective for the Territory, given its unique remoteness, is that it would be great to have a company tax rate here about one-third lower than that of the rest of the country for NT-based businesses," he said.

A Labor spokesman said there would be legislated safeguards to stop the NT becoming a tax haven.

Tests would be written into the legislation to ensure any business receiving the company tax cut were undertaking a minimum level of economic activity in the north.

The foreign investment proposals in the policy paper include removing or increasing the thresholds at which bids are scrutinised.

Alternatively, it proposes removing up-front screening requirements where foreign investors enter joint ventures with existing owners rather than buying 100 per cent of the enterprise. The new conditions would apply only to privately-owned foreign investors and would not apply to residential property.

The paper also canvasses offering incentives to WA, Queensland and the NT to abolish or harmonise inefficient state taxes such as payroll tax and stamp duties.

The seats targeted include Lingiari and Solomon in the NT, the latter of which is held by the Coalition, the northern Queensland Coalition seats of Dawson, Herbert and Leichhardt, and the Labor seat of Capricornia. WA Premier Colin Barnett said the policy could have profound implications for vast offshore oil and gas reserves in the Kimberley region. “I support tax concessions and incentives for development in the north of Australia, and I wonder immediately why is the Kimberley excluded, and indeed why is northern Queensland excluded?" he said. Victorian Treasurer Michael O’Brien slammed it as an “absolutely ridiculous thought bubble".

“It doesn’t create one extra job it just shifts jobs for political purposes."

Mr Katter, who is being wooed by both major parties to swap preferences, said he was sure the northern Australian policies announced by Mr Rudd and Mr Abbott partly had him in mind. He applauded the sentiment behind the policies. “It would be far better to have a tax haven in the Northern Territory than the Cayman Islands," he said, but the proposed relaxation of foreign investment restrictions “scares the hell out of me". He said the Chinese would move in and import their own workers using 457 visas.